Regulation H

Regulation H is a regulation set forth by the Federal Reserve. The rule outlines the requirements that state-chartered banks must adhere to upon becoming members of the Federal Reserve System. It also lists the procedures for membership that prospective members must follow and sets certain limits and requirements on some loan types.

Regulation H specifies the duties expected of and privileges available to each member. The regulation also states the rules regarding securities-related activities by member banks. It requires any state-chartered bank that acts as a securities transfer agent to register with the Federal Reserve Board.

Part of the regulation stipulates that a bank's capital must be sufficient in relation to the condition of its assets, liabilities and other corporate responsibilities. The capital adequacy of each member bank will be assessed according to standards set by Regulation H.

Whether or not a member meets these standards can affect a bank's ongoing operations. For instance, member banks cannot pay out dividends and other distributions if they are not adequately capitalized.

Regulation H also prohibits the use of interstate branches primarily for deposit production. Part of the assessment process by the Federal Reserve System examines the loan-to-deposit ratio at banks. The Federal Reserve also reviews as needed the loan portfolios of member banks to determine if they are taking reasonable action to satisfy credit needs for the communities where their branches operate.

Regulation H includes a number of lending limitations rules for member banks especially with respect to areas that exist in special flood hazard zones. This applies to loans secured by buildings or mobile homes in areas that were designated as flood hazards by the Federal Emergency Management Agency. Banks who are members may not make, extend or renew such loans unless the property that secured the loan also has flood insurance coverage that lasts for the duration of the loan.

Additional stipulations of Regulation H that member banks must adhere to include a requirement that they adopt written policies that set limits on extensions of credit that are secured by liens on or interests in real estate. Member banks are also directed to institute security measures that discourage certain crimes as outlined by the Bank Protection Act. Regulation H requires member banks to file reports on suspicious activity and to comply with the Bank Secrecy Act regarding recording keeping on currency and foreign transactions.